Avoiding The Pitfalls Of Rent To Own Real Estate

Dated: 05/19/2015

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Although rent-to-own properties come with serious risk, many buyers still find them to be their best option. If such cases, there are ways in which a shopper can go about selecting a rent-to-own home while avoiding some of the greater pitfalls. If you are in the market for a home and want to pursue this type of contract, consider the following suggestions before making the rent-to-own to homeownership transition.

How You Can Rent-to-Own

If you and a seller agree upon a rent-to-own arrangement, negotiations can begin for both a final purchase price and purchase date. From there, the prospective buyer pays a monthly fee, which usually includes rent slightly higher than a normal rate and an option fee. A lease can last anywhere from months to years, and any time during the rental period the renter have the option to purchase the home.

The amount of rent exceeding market rate will often be credited back should you purchase the home you were leasing. These funds can be put toward a down payment, used to cover closing costs, or pocketed. Just be aware, if you decide against purchasing the house all the money collected will stay with the seller as a way to justify the property’s time off the market while you were renting.

How Rent-to-Own Benefits Sellers

For sellers, rent-to-own is a better alternative when faced with difficulty in selling the property. This option is also beneficial to the seller in that the final purchasing price remains locked regardless of whether the market value dips, so there is no need to worry about the home depreciating in value during the rental period. In the meantime, the added monthly income will help the owner cover costs while the title is still in his or her name.

How Rent-to-Own Benefits Buyers

For those who are looking to buy a home, but are not earning enough money to obtain a mortgage or make a down payment, the rent-to-own option can be a means of getting into a house faster. Just as sellers take comfort in knowing the price will remain the same if the value dips, buyers can rest assured knowing the same is true if the value increases.

Fees, such as property tax, homeowners insurance, and private mortgage insurance are taken care of by the owner during the rental period. Above all, the greatest benefit of renting-to-own is the chance to live in the house for a period of time before committing to a purchase. Instead of investing a large portion of money into a place you might not like down the road, you are given an extended period to decide whether or not this is the residence for you. Best of all, should you decide to walk away, you may do so without any consequences other than leaving without garnering a reimbursement for the extra amount paid in rent.

Pitfalls for Buyers and How to (Hopefully) Avoid Them

The biggest risk involved in signing a rent-to-own lease is the possibility of the seller losing the house. You may also run into an untrustworthy owner who could refuse to sell in the end, or who might be steeped in troubling debt. At the end of the rental period, you may still not qualify for a mortgage to purchase the home, thus nullifying your entire investment. If you have any doubts regarding how you may qualify, consult with a mortgage broker before renting to own.

In order to ensure the smoothest transaction possible, be sure to run a background check - including a credit report - on the homeowner before entering any kind of agreement. Be meticulous when going over the agreement; make sure it’s clear who is responsible for repairs or maintenance, and always go for a “lease-option agreement,” over a “lease-purchase agreement,” so that you can choose not to buy the home if it is not right for you.

Researching the market, in conjunction with a home inspection, can determine if the seller’s price is fair, especially considering the possibility of the property’s value dropping when it’s time to buy. Also, receiving a condition of title report will give you a better idea of how much equity and stability is in the house.

Entering a rent-to-own agreement is very risky, and while there are many precautions you can take to avoid pitfalls, it is always best to consult with your local real estate agency, where an expert who is on your side can assist you in becoming a homeowner while reducing the financial risk.

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Chenea Powell

Whether it is your first home or the home you plan to retire in, I will be there to ease the process every step of the way! I find great pleasure in helping people achieve their goals in real estate a....

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